GST increase does not tackle the fundamental problem

If we are going to "reform" the tax system let's be very clear about what we are trying to achieve. Because reform for its own sake isn't really reform at all.

Mike Baird's proposal to lift the GST from 10 to 15 per cent would certainly raise a lot of money ($32.5 billion to be precise).

But under the plan, the gains would be almost entirely offset by corporate and income tax cuts, and a truckload of compensation to the lower income earners who pay little or no income tax but do pay the GST.

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This is fine and dandy if the objective is deliver income and corporate tax cuts and – at a pinch – to make the tax system a bit more efficient.

It does very little to address the looming funding shortfall the states collectively face for health and education inflicted by the Abbott government in its first budget.

In the case of health, the decision was taken to scrap a funding model linking payments directly to activity in hospitals. Instead, the federal government announced that funding for hospitals from 2017 would be linked to inflation, which has obviously been rising at a much slower rate than health costs have.

In the case of schools, the federal government has refused to fund the final two years of the Gonski reforms, with Malcolm Turnbull recently suggesting there would be "no fistful of dollars" on offer.

According to analysis from the NSW and Queensland governments, on current trends the funding gap for schools and hospitals will be running at a massive $45 billion a year by 2029.

It seems to me this is the real, fundamental problem, and Baird's proposal would do little to address it, leaving a cumulative funding gap of $4.3 billion over the four years to 2020-21.

This gap could of course could be narrowed if Baird's proposal were watered down to, for example, scale back the corporate or income tax cuts. But then we get even deeper into the sticky question of fairness, particularly since the GST is a "regressive" tax, hitting people on lower incomes proportionately harder than those on higher incomes.

An alternative would be to consider Victoria's plan to lift the medicare levy by 1 per cent. This would at least be a "progressive" tax increase, meaning those on higher incomes would pay more. Ultimately, any chances will require a consensus from the states and the Commonwealth. Right now that seems a long way off.